Why Rent Control Doesn't Work
freakonomics.com
freakonomics.com
For a market to work, it must always be the case that using the item to cause some socially useful economic flow to happen is more profitable than sitting on it, or trading your hoard with other hoarders. Ideally you go bust quickly if you sit on it, much as you would with perishable goods.
When you apply that view to housing services you find that the power to exclude is the hoard that needs defeating. Keeping an apartment empty and outside the housing services supply market should be cripplingly expensive.
Ask yourself this. What's the market force that drives rent prices down and is it equivalent in force to that which drives rent prices up? People need housing to live, but housing only needs people if there is a chance of a profit.
Toronto has roughly 23% [2] of its for sale stock vacant, unfortunately there have been no openly published numbers on total vacancies.
[1]https://www.cbc.ca/news/canada/british-columbia/empty-homes-... [2]https://www.narcity.com/ca/on/toronto/news/a-shocking-number...
It is? I mean, if you owned an apartment that could rent for $3000/mo, then keeping it empty is a direct reduction of your income by $3000/mo.
The problem seems to be that offering an apartment under a rent control regime creates an opportunity cost, so maybe the owner thinks it's worthwhile to "spend" $3k/mo to achieve a future return some other way.
If you've rented a rent-controlled apartment for a long time, even if it's huge (because you rented it when you had a large family), then it is not cripplingly expensive to hold on to it when your needs change.
It is cheaper, in fact, for you to hold on to your 6 bedroom apartment, though you use just one room, than it would be to swap it for a one bedroom apartment because you'd lose the rent control price. (See the example of Nat Sherman.)
If you move to another rent controlled Unit, there's very limited situations where the landlord can increase the rent beyond the limits.
A big problem is probably once you've implemented rent control, changing the system later becomes increasingly more difficult the longer it's been in place... as someone is always going to lose out.
If you move to another rent controlled Unit, there's very limited situations where the landlord can increase the rent beyond the limits.
In a city with rent controls, however, finding another unit that is the right size and has rent control is not easy (because everyone is hanging onto their units — and in some cases illegally subletting them). This becomes a self-perpetuating cycle, where there is a decreased supply of available units, which makes it less likely that people in rent-controlled units will dare to venture out and look for another unit that is a better fit in terms of size/location/etc.
If your monthly rent in the city is between 500$-2000$/mo, but you could feasibly rent 100$-500$/day, you might opt for the second. This would take the property off the long-term rental market.
That depends on the secondary capital effects of the reduction in supply. If you keep that and several other apartments empty in an area then you force up the rents and capital prices on the ones you do let out.
Just like De Beers drip feeding diamonds onto the market, or the Saudis drip feeding oil.
It's more likely that the tenants could potentially damage the property and will require maintenance to the owner, and the rent isn't worth it vs the property's natural capital gain. Esp. if the property was rent controlled.
Property prices (and thus rental prices) needs to float at a market rate - any artificial control will just distort it in such a way that it doesn't really make it more beneficial. If housing affordability is the issue, that's a matter of government policy problem (from zoning, to taxing capital gains too lax).
Not realizing potential profit is not the same as losing money. If I own an apartment that costs $0 to maintain, then not renting out that apartment costs me nothing. It's not "cripplingly expensive" just because I _could_ rent it out for $3000/mo. It actually has zero impact on my income, and I could stay like that forever.
The cost of keeping an apartment empty is only the amount it costs to maintain it.
So, while it is true that not renting would mean not getting that $3000 a month, it really comes out to chump change when you consider how the price of the property has rapidly risen.
Jerusalem tried this. Lots of apartments owned by wealthy foreign landlords who only occupy the apartments once or twice a year, if that, on holiday, transforming large sections of the city into ghost neighborhoods.
https://www.timesofisrael.com/jerusalem-ups-ghost-apartment-...
It hasn't worked. Odds are that the tax on empty apartments simply isn't high enough. So the question is, how do you determine the tax rate to make it adequately "crippling" to absentee owners? Should it be some factor of the property's value? Won't matter, it'll be factored in as part of the cost. Should it be some kind of wealth tax? Not really possible, since as foreign owners, most of their wealth is located abroad.
It makes sense on paper but it's fairly difficult to carry out in practice.
Thus if you have your secondary unoccupied residence in that zone, then it would be a zoning violation so you must live in it or rent it out.
Furthermore, even if you could figure out a way to set up zoning regulations to achieve these aims, how would you penalize violations? Fines are just factored into the cost of ownership, just like the taxes on empty apartments.
This also removes the disincentives around making property improvements. It makes little sense for cities to penalize people for renovating and improving property.
It also adds healthy competition among landlords/owners and encourages higher density in places where land value & demand is high.
In such an environment, switching to a land value tax is regressive.
A general tax credit could be distributed more fairly and would allow seniors to choose to spend it on rent, but also allow the option of moving somewhere different/cheaper, or spend it on a greater want/need.
The land value tax is still important as it incentivizes development and density where it makes sense. Landlords cannot sit back and rent-seek. If developers around them are making the area nicer, they will soon be priced out unless they follow suit. Similarly, as demand & density increase, area tax revenues also increase allowing for the building of infrastructure to handle the higher density.
General / flat tax schemes for situations like this tend to be regressive.
> Landlords cannot sit back and rent-seek. If developers around them are making the area nicer, they will soon be priced out unless they follow suit.
So, separately from the ghost town situation in Jerusalem, there's a phenomenon in Tel Aviv where there is undeveloped beachfront property worth literally hundreds of millions of dollars with some one-story house sitting on the land and falling apart. If you delve into the reasons why it hasn't been sold to a developer, you find out that the original purchasers have several generations of inheritors, with ownership divided among thousands of people. Because those thousands of people can't unanimously agree on who to sell their shares to and at what price, the land sits undeveloped, and the situation gets worse over time as the current owners have children of their own and the current owners' miniscule shares get divided even further. Many of these properties are locked up in court battles with family members trying to sue to force the sale of shares by some third or fourth cousin they barely know.
When people are literally looking at hundreds of thousands of dollars for their ownership stake, and they still can't sell, how is the financial incentive established by the LVT any different in terms of being able to bring about a result in getting the land developed?
In the netherlands we have a saying: "Little house, little tree, little animal" (huisje, boompje, beestje). It means: Family life in a suburban home with a pet, a kid or two, a house with a garden, a car on the porch, a stable job, and the home is yours, you're paying off your mortgage, and you'll grow old with a nice nest egg in the form of having built up actual ownership, converting your salary into paying off the mortgage in the timespan of your career.
That's one kind of home owner. Of particular note is that at least in The Netherlands, and I bet in the UK too, the government likes this image. Most citizens do too. So, there are tax breaks for paying off mortgages and such.
The other kind buys as many houses as they can, converts it to crappy rent and because the dream, and the government's policies, are somehow trying to marry the mutually exclusive notions of 'anybody should be able to afford a starter house' and 'all houses should be good investments, giving you more return than just sticking that money in a bank someplace', rent is really high because the competition of just buying a house is really expensive too.
I bet that it is politically virtually impossible to attempt to deal a blow to the 'huisje, boompje, beestje' owners even if it makes perfect socio-economic sense.
So, seeing that as a political impossibility, you're looking for a way to somehow tax only the second category and also doing it in a way that lobbyers of the second category can't misconstrue your plan to get the first category on board.
I bet this is extremely hard to do: It's all one market, after all. If the second category is taxed into oblivion, their demand will cease to exist, which means house prices, also the house prices of the 'huisje boompje beestje' folks will fall drastically. This will do excellent things to the affordability of rent, but it makes those career folks edgy, to say the least.
It'll take quite a while for sufficient generational turnover (and 'the youths' need to vote A LOT more. Even if it does not matter at all; politicians are incentivised to chase policies that benefit those who vote) for me to believe any law that will screw over HBB folk is going to pass.
They may not be able to achieve it, but if anything, I'd think that they're more likely to vote in favour of it.
I'm young. Effectively since high school I've been working towards that life. It's what I consider to be a good, successful life. Relaxing in front of the fire or kicking about in the garden with the kids.
In the UK we don't have the American exurb life for the most part, but a little terraced house with a garden on a quiet street - sign me up.
There is nothing impossible about this unless you expect that an infinite number of people should pile into one city regardless of economic viability.
Specifically: The protected view law reduces crowding. Without it, the # of folks living per square kilometer in London would be higher than it is right now, and that would mean London needs to expand all sorts of services (medical, public transport, heck, even the # of butchers and the like), needs to deal with more concentrated pollution, and in general just needs to 'run better' just to keep up the same standard.
And that is not a stupid goal.
Yes, it clashes with affordable rent. I have no solutions, just pointing out that the idea 'hey, affordable rent is way more important than protected views, so, duh, get rid of that law!' is probably a bit shortsighted.
It also assumes a zero-sum economy. Once you have more population density you have more of a tax base to pay for all those things, and some fixed costs go down as density goes up.
The claim that public transit of all things is going to get worse with higher density is, frankly, ridiculous. If it really persists as a problem you can use the extra money from the new tax base to bring in urban planners from Tokyo.
> I have no solutions[...]
I have one to address NIMBY-ism everywhere: We say sure, you can have "protected views" or whatever, but then you need to pay market value for those things.
We'll see how long that lasts when people need to pay out of pocket for the opportunity cost of not constructing a skyscraper just to occasionally enjoy the view, as opposed to incumbents getting to vote for "free" and getting the direct benefit of their property values rising.
A more ideal solution is to add subsidized competition. Remember how all the Republicans were railing about Obamacare's public option, about how no competition for that could ever make money? Well, force these SOBs to get creative.
Also, can we please limit our housing to humans and just banks that exist in our country? And not imvestment banks? Im getting tired of trying to buy a house, only to find some Israeli, European, Chinese, etc bank bought it, - or Bear Stearns - and will bring it back to market in 6 months at a 30% price increase for the effort of mowing the lawn.
Or worse, if that investment bank buys an apartment building or old hotel. They'll just "renovate" mostly with paint, start up a building management company, add in bougie things like concierge services, and then try to charge double the market rate.
If my future home is your investment property? I see very clearly how much you're making off me. And I'm considering other options purely out of spite.
I would argue at least in cities this would solve most problems. Humans must be either the owners or the tenants, and banks must put all their houses on the market within 1 year of a ownership/tenancy change, or face expropriation.
> For a market to work, it must always be the case that using the item to cause some socially useful economic flow to happen is more profitable than sitting on it, or trading your hoard with other hoarders. Ideally you go bust quickly if you sit on it, much as you would with perishable goods.
Agreed!
> When you apply that view to housing services you find that the power to exclude is the hoard that needs defeating. Keeping an apartment empty and outside the housing services supply market should be cripplingly expensive.
Aaand you've lost me. IMO it's not the people keeping an apartment empty and off the market that are the issue - they're suffering a loss for this, equivalent to the rent. No, the people 'hoarding' are, essentially, the NIMBYs. It costs me nothing to prevent you from building 1000 apartments to replace a parking lot in Downtown LA, but that lowers the value of my house (reduced demand) so I'm going to make it as legally difficult as possible - that sort of thing.
I don't have opinion on rent control in question, but I can see it as yet another form of redistributing money "from rich to poor". Every single revolution happened because of income disparity, so I can see it as a form of loosening that tension a bit. Whether it works -- I don't know.
i myself am in a rare camp that believe the great depression was caused by a decline in population blip created from ww1/spanish flu. the pattern seems rather consistent, you first have a boom (roaring 20s) followed by a difficult / if not impossible to end depression - like Japan as well. but I'm in a rare camp, so don't take my opinion for a grain of salt.
Surprisingly, Roosevelt's attempt to boost the economy with public works in the 1930s didn't help much. If you look at charts around this time, economic inequality was decreasing and the median wage was growing linearly with productivity. It was also during this time that rent control was implemented as a public policy (mentioned in the podcast).
Except that rent control is not usually means tested.
If you've lived in a rent-controlled apartment in SF for 10 years, and worked as a software engineer all that time, you might choose to stay put even if you buy an apartment. You can pay rent at slightly above prices from 10 years ago, and receive market rent on your new place.
So the question becomes, if not rent control, then what do we do to keep our cities livable to a range of people?
I'm not sure I follow. Why would a large proportion of properties being owned by landlords reduce affordability?
"So the question becomes, if not rent control, then what do we do to keep our cities livable to a range of people?"
Allow people and companies to build apartment buildings, either on green field sites, or by knocking down houses. Stop allowing existing property owners (NIMBYs) to veto new building.
A five or ten year fixed lease, if you can negotiate one, might.
It's completely unsurprising that on a year-by-year lease the rent might rise and you may want to move out. That's what a 1 year lease _is_.
All of the emotional pandering surrounding that is simply unnecessary. If you want to live somewhere for an extended period you either need a long lease or to buy a place.
That's not a politically popular viewpoint for reasons I can't quite understand.
It's only emotional pandering if you don't think politics should be a useful instrument to people without money.
There is no "should" here. It's definitional. That's literally what a long lease is, as opposed to a short lease.
> It's only emotional pandering if you don't think politics should be a useful instrument to people without money.
It's emotional pandering because it's devoid of actual logic.
You've injected the 'people without money' bit here as if it's relevant when actually this is a matter that affects everyone.
One should realize that politics can be used to cement long terms societal stability, and not just make one rich as fast as possible.
It can't make a short term lease a long term lease though.
You can, of course, eliminate or curtail short term leases.
Whether such a thing is preferable is up for question.
Moreover, moving is expensive and can take months of planning. If rent prices rise beyond affordability, you're pushing a heavy burden on your tenants, and landlords should have an obligation to exercise that power responsibly.
If the rent is too high why not just give people money and let them spend it on rent? That's probably idiotic but it makes more sense to me then telling the people renting out units that they have to charge a certain amount. At least in this case you still have a price signal - though if you toss money like it's nothing at a problem you tend to get inflation especially if you give people money and tell them they have to spend it on a single good.
A better fix is to increase the supply of housing and to the extent it's possible lower the fixed costs for building. If there's more of it the price will go down. I understand the argument that says "If we let them build more they'll only build for rich people" Sure. My answer to that is let them build more. It will take time but eventually the supply of units for non rich people will increase and when it does the price will go down.
That's all easy to say but I doubt any of that will happen.
This doesn't work because the money will go straight to landlords. Rent prices simply increase across the board. There's even an argument that indirect improvements, like building parks and improving infrastructure, generally does not benefit renters since it drives rental prices up. Landlords reap the majority of the benefit.
Building more would definitely help, but that is directly against the interest of existing landlords. They will fight it hard since it will generally erode their views and decrease their property value.
We really need a solution that incentivizes higher density where there is high demand.
I would guess this only guards against sudden, extreme increases; eventually, someone on fixed income will have to move somewhere cheaper, but at least they know what's coming and have some time to figure it out.
It seems unlikely these studies say very much about mild rent control.
Could blockchain solve this?
Joking!
Current renters. Future renters get locked out.
What are the arguments about who it doesn't work for?
By discouraging development, it creates an environment where the only people who can afford housing are the rent control lottery winners, and the very wealthy who can outbid everyone else for the few remaining units. In other words, San Francisco.
I would also add that it also creates the ideal environment for corruption and organized crime, as bribing decision-makers becomes the only way for some to have access to desirable housing. Supply and demand always works, and if those with a higher purchasing power are in the race then their highet offers are extended through side-channels.
When all is said and done, I'm not opposed to discriminating against future renters.
My reasoning: I grew up in Portland, and I love(d) the art and music scene there. And, lots of the people who were at the forefront of building that culture (rightly or wrongly) did not (or could not) invest in their long term housing future by buying a crappy house in a terrible neighborhood that now is totally gentrified. I feel like they made an investment in the quality of life that I benefited from, and rent control seems like it helps them. It does discriminate against future renters. But, isn't that the point, that future renters didn't invest in the city in the same way? I would love to find a solution that makes it so that future artists can come in and make the same contributions without having to be trustafarians, and it seems like organizations like the Actors Fund in NYC (https://actorsfund.org/) work to make this possible in a small way.
I do see that rent control policies discriminate (prevents a pure free market) against property owners. But, it does not seem like we are really accounting for all the benefits they get when a property increases in value because of the investments made by renters in the area. If we could do that honestly, maybe we could come up with a more honest way to handle rent control.
Note that in the typical case the "future renters" are the kids of the current renters....
I know multiple people that are subleasing rent-controlled apartments in SF. The actual renter lives well outside of SF, and sublets the apartment at slightly below market. This works out for both the original renter and the new renter (who would not qualify for rent-control) so there is negative incentive to report.
In some cases, the renter can live off the delta in rent and 'invest' nothing but the security deposit. Risk of getting caught is minimal, and there is little paper-trail.
Interestingly, you now have two people / families rather than just one that is pro-rent control.
The great thing about this episode is that it actually does something that most popular discussions of rent control don’t do: it acknowledges that it does work, for the rent controlled people. It also acknowledges that the harms of rent control are smaller, and spread across a large number of people (which is why rent control policies are popular).
I know just one anecdotal example and I am sure there are many other examples on the other side where rent control helps. But to me, it looks like rent control really distorts the market way too much to be an effective solution to the housing crisis.
Decommodify housing. Full stop, no rents. Housing by need.
I've lived, though as a child, in a place where housing was distributed "by need" -- the USSR, though even then in the 80s things were liberalizing some. It was, in retrospect, a horrible combination of corruption, underinvestment in housing, and what would in the modern West be considered terrible living conditions.
And anyone relying on their labor. If the cost of living goes up for those people then the cost of other things go up. It's in everyone's interest that cheap housing is available (by some means or other), but lately we've all been sacrificing for the literal rent seekers.
People wanting the goods and services wouldn’t be happy with what is available and they would leave.
If you want to increase rent costs by more than 2% you’re acknowledging that your property value has increased by more than 2% and you should pay taxes on that. But the tax valuation can’t increase by more than 2% so you shouldn’t be able to increase your rent by more either.
So I’d favour something strong than rent control (that only applies to continuous residents), I’d say that no rent, lease, or similar arrangement can increase at a rate of more than 2% (or whatever the limit on increases property taxes is) year on year, irrespective of occupancy, or changes in tenants.
* Cambridge: removes rent control, prices go up.
How do you show the causal relationship? Seems like there's constrained housing supply everywhere.
Rent goes up because people can afford it, so this is actually not a problem that needs to be solved. What needs to be solved is the fact that 100000 people cannot find a place in the city at all. No matter how low or high the price of rent is, you will always have a shortage of 100000 units if you're not increasing the supply.
Add in that suddenly after Koch industries became a sponsor of their radio show/podcast they did a total softball interview of one of the Koch brothers with no disclaimer that they were a sponsor
Particularly liked their take on climate change: “sure it exists, but there’s no way governments can solve the problem - but if we give corporations trillions and trillions of dollars we can engineer a solution”
When you think of a city's economy as a static system you can tell yourself that you can predict the result of fixing a single variable (e.g. rent in this case). Of course over time it has results you might not have anticipated, and results that are hard to fix due to hysteresis (e.g. rents go up slowly, so buildings are not maintained, and suddenly you get to the point of a lot of derelict buildings and no tax base proportional to your maintenance needs).
Is that because the removal of rent control caused a net loss of the poor in Cambridge? Certainly not all of those who'd have a hard time affording Cambridge were committing crimes.
Maybe some kind of rent control buyout program would make more sense.
Seems weird to subsidize one side but not the other.
Correct?